Is Hilton Expanding Too Quickly in Myanmar?

Myanmar has been mostly closed off from the west for around the last 50 years due to military rule. It has recently enjoyed a surge of growth following significant reforms, leading to most EU and U.S. sanctions being lifted. Its a big market: approximately 60 million people and little or no competition in several industries.

Hilton Worldwide Holdings (NYSE: HLT) wants a piece of the action, announcing in early 2013 that it has ambitious plans to build a hotel network within the country. Combining growth in business with a surge in tourism, Hilton looks well positioned to take advantage of these conditions, right? Not so fast...

The new Southeast Asia tourist destinationWith relaxed visa requirements, and only a one-hour flight from nearby Bangkok, Thailand, the country is more accessible than ever. Discount airlines often charge less than $60 one-way, offering tourists compelling value.

Bagan, Myanmar (2013) Source: Mike Fee (author)

There are beautiful temples, ancient cities, and magnificent seaside resorts. In November, 2012, Barack Obama became the first U.S. president to ever visit the country. But perhaps the biggest driver of tourists is curiosity.

The first time I visited in 2012, roughly one million tourists flocked to "The Golden Land." In 2013, the total number doubled to just over two million. The Ministry of Hotels and Tourism expects 7.5 million arrivals by 2020.

A massive shortage of hotel roomsYangon, the former capital and still the economic and financial center of the country, is suffering from a huge shortage of hotel rooms. Large international hotels take years to build. Guesthouses can often accommodate only a handful of people.

According to Myanmar's Ministry of Hotels and Tourism, there were about 10,000 hotel rooms in Yangon at the end of 2013, only about 2,000 of which were considered to be of international standard. Luxury hotel occupancy has increased from 45.8% in 2009 to around 80% in 2013. RevPAR during this period has soared from $40 to $157. The number of hotels will triple by 2015, according to research firm Jones Lang LaSalle. There is a lot of evidence that suggests a huge surge in hotels is coming shortly. Both public and private hotel companies want to fill that demand.

In April, Marriott (NASDAQ: MAR) was planning on building a large hotel in the country's new capital, Nay Pyi Daw, but it pulled out of the deal because of a dispute related to quality control. Swiss hotel chain Kempinski quickly stepped in and took over the project. Other hotel competitors, including Starwood (NYSE: HOT) and Intercontnental (NYSE: IHG) ,are not in the market...yet.

However, their large portfolios of familiar luxury brand names include: St. Regis, Sheraton, Westin, Le Méridien, Crowne Plaza, as well as budget hotel Holiday Inn already have significant international exposure. Living in Bangkok, Thailand, I have seen every single one of these brands. These are large companies with deep pockets, looking for the next growth opportunity. So it seems likely that one or both companies will be in neighboring Myanmar soon. Private hotel giant Accor is scheduled to open three Myanmar properties later this year under its Novotel and Pullman brands, while other private hotels scheduled to open include Amara and Pan Pacific.

It's a crowded space.

Hilton's Yangon headacheIn March 2013, Hilton reached an agreement with Thailand-based LP Holding to manage Hilton Yangon in the 21-story Centrepoint Tower, a mixed-use project in the city's downtown area. But progress has been delayed multiple times trying to complete the 300-room hotel. Construction began in 1995. It was halted in 1998 after the Asian financial crisis, and finally had a soft opening in 2006.

In March 2014, the company said in March that it was aiming for a partial opening of around 150 rooms by the end of the year. The project has been pushed back again to late-2005 or early 2016. So what's causing the massive delays? Mostly, it is a massive shortage of skilled labor. The problem is so big, Thailand sent skilled workers to Yangon to help, but the majority of them quit due to low pay and poor working conditions.

Construction in Yangon (2012) Source: Mike Fee (author)

Five more hotels in the pipelineOn June 11, 2014, Hilton signed an agreement with Eden Group, to open five new hotels over the next three years. The deal will rebrand two existing Eden hotels and open them under the Hilton name around October 2014, as well as building three additional hotels outside of Yangon.

TakeawaysSo should investors buy into Hilton Worldwide and sleep well at night? After the Centrepoint Tower project's woes, the company certainly is finding out the hard way how hard it is to do business in Myanmar. Continuing to expand with five additional hotels seems a little ambitious, but it will position the company ahead of its competitors. Since two of Hilton's hotels are expected to open this October, I would wait and see if it opens on schedule.

Myanmar is a very small part of the overall business, but it can still grow into a big one.

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